The Public Company Accounting Oversight Board said Friday that it has entered into a memorandum of understanding on enforcement cooperation with the China Securities Regulatory Commission and the Ministry of Finance, in a breakthrough on a long-running priority for the PCAOB, but stops short of giving it the right to conduct inspections.

The MOU establishes a cooperative framework between the parties for the production and exchange of audit documents relevant to investigations in both countries’ respective jurisdictions. Specifically, the PCAOB said it provides a mechanism for the parties to request and receive from each other assistance in obtaining documents and information in furtherance of their investigative duties.

"This agreement with China is an important step toward cross-border enforcement cooperation that is necessary to protect the interests of investors in U.S. capital markets,” said PCAOB Chairman James R. Doty. “We look forward to continued progress with our Chinese counterparts to reach an agreement on cross-border inspections of PCAOB-registered firms as well,” he said.

In addition to developing an enforcement MOU, the PCAOB has been engaged in continuing discussions with the CSRC and MOF to permit joint inspections in China of audit firms that are registered with the PCAOB and audit Chinese companies that trade on U.S. exchanges.

The agreement does not entitle the PCAOB to conduct inspections of auditing firms in China, either on its own or in tandem with Chinese regulators, which has been a long-time goal. The PCAOB also cannot access the work papers except in the case of an enforcement action against an auditing firm. Still, it represents a major breakthrough for the board. The PCAOB and the Securities and Exchange Commission have expressed concerns about the quality of the audit work done in China, especially for Chinese companies that have done reverse mergers with shell companies in the U.S. in order to be listed on U.S. stock exchanges. Investors have become wary of such companies after questions arose about their financial performance and several have been delisted or gone out of business.

Under the Sarbanes-Oxley Act, the PCAOB oversees all accounting firms that audit public companies whose securities trade in U.S. markets. Approximately 47 audit firms in China are registered with the PCAOB, including affiliates of the Big Four. The SEC and the PCAOB have been trying to get audit work papers from a Deloitte affiliated firm in China after financial problems arose with a Chinese company, Longtop Financial Technologies (see SEC Charges Deloitte with Refusing to Produce China Work Papers). The SEC has also pressured the other Big Four firms, as well as BDO, to produce audit work papers for their Chinese clients (see SEC Charges China Affiliates of Big Four Firms). The firms have said they are not allowed to produce the work papers because of restrictions under Chinese law. The memorandum of understanding should open the door to giving the PCAOB access to the documents.

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